Yen Slides After Finance Chief Says
Japan's Economy Is 'Near Collapse'
By PETER LANDERS and MICHAEL WILLIAMS
Staff Reporters of THE WALL STREET JOURNAL
TOKYO -- Japan's finance minister, in remarks that sparked heavy selling of the yen, surprised investors with a warning that the government's finances are "near a state of collapse.''
Kiichi Miyazawa's comments Thursday were just the latest in a recent series of statements by Japanese economic authorities that have prompted investors to sell the Japanese currency. Wednesday, Bank of Japan Governor Masaru Hayami and Mr. Miyazawa himself also made remarks suggesting that the government would accept a weakening of the currency.
Mr. Miyazawa, seeking to control the damage from his outburst, later Thursday protested that wire-service accounts took his statement out of context, but his aides confirmed the wording of his remarks. Adding to choppiness in the foreign-exchange markets, Mr. Hayami also seemed to backtrack on his statements, and said a strong currency was in Japan's interests and the central bank would continue to mop up any yen created as a result of foreign-exchange intervention.
The yen was trading in Tokyo Thursday at around 120 yen to the dollar, near a 20-month low, after the comments by Messrs. Hayami and Miyazawa.
In midmorning trading in New York, the yen recovered slightly, trading at 119.55 yen to the dollar, from 119.92 yen late Wednesday in New York.
The Japanese officials' remarks come at a time of mounting concern over Japan's slowing economy and its weak banking system, which is showing renewed signs of severe strain. On Monday, Japan will announce gross domestic product for the October to December period of 2000. Some analysts expect output to have contracted for a second straight quarter, putting Japan in recession by the popular yardstick of back-to-back quarterly contractions.
Analysts also point to a further worrying detail expected in Monday's report: the little-noticed nominal, or nonadjusted, GDP growth is likely to be weaker than "real,'' or price-adjusted, GDP growth.
Most reports on any nation's figures for gross domestic product growth focus on so-called real growth, which takes inflation into account. If the total value of goods and services produced goes up 5% while inflation is 2%, then real growth is 3%, and that is the number economists tend to look at most closely.
But Japan is a special case. Here, prices are steadily falling, rather than rising as in almost every other nation. The gap between nominal GDP -- the raw value of what the nation produces -- and real GDP has been one of the best indicators of deflation. While the changes in nominal and real GDP were the same in the first two quarters of 1998, since then nominal GDP growth has always been worse than real GDP growth.
There is another reason to look at the nominal figures. Debts aren't indexed to price changes. So if the nominal value of what companies produce is falling, that means their debts are getting bigger in practical terms. That is the last thing that heavily indebted companies in industries such as retail and construction need. The inability of borrowers in such industries to repay their loans is the reason why Japan's banking system has been plagued with a huge burden of bad debts for the past decade.
A good example of the importance of nominal growth came in the second quarter of 2000, when Japan's economy shrank 0.4% in nominal terms. When adjusted for deflation, the figure turned out positive, showing "real" growth of 0.2%. The headlines talked of growth, but in fact the economy remained in trouble. A similar phenomenon could occur again on Monday. Some economists are predicting real growth of around 0.5%, but it isn't clear if the nominal figure can make it above zero.
The government's fear now is that the deflation is beginning to feed on itself. The more prices fall, the likelier Japanese are to save a lot of their income in the belief that their yen will have more buying power in the future. And the more companies see their revenue falling in nominal terms, the more they rush to cut costs, accelerating a downward cycle of prices that tends to choke the economy's vitality.
Thursday brought fresh bad news: Core machinery orders, an important leading indicator of investment, plunged 11.8% in January from the previous month, and household spending fell 0.5% in January compared with a year earlier.
"The fall in prices is rough on the economy,'' said Taichi Sakaiya, a former minister of economic planning who now serves as an adviser to the government, in a speech at HSBC Securities (Japan) Ltd. Though official figures suggest prices are falling at a rate of around 1% a year, ``in fact I wouldn't be surprised if they're falling 10%,'' Mr. Sakaiya said. "Government statistics are insensitive to both inflation and deflation.''
One proposed answer to deflation is weakening the yen. That would tend to raise the prices of imports in Japan and perhaps the overall price level as well. But a further depreciation of the yen would likely hurt Asian countries that compete with Japan, and also anger foreigners who invested in Japan when the yen was stronger. (A weaker yen would make those investments worth less when repatriated back into foreign currencies). For these reasons, Mr. Sakaiya said, the fall in the yen is "reaching the limits of ... toleration. We should ensure that it doesn't get to 130 yen."
Mr. Miyazawa's "collapse" comments Thursday referred to Japan's exploding government-budget deficit. As of March 31 this year, Japan's total public debt will reach 666 trillion yen ($5.571 trillion), which significantly exceeds the nation's annual economic output. The debt is the biggest in the world in absolute terms, and Japan has the highest percentage of debt to gross domestic product, now approaching 129%, among major industrialized nations.
Many politicians and private analysts have warned about the debt burden, but the warning delivered a shock coming from the veteran finance minister, who has a reputation for being the steadiest and most prudent leader among Japan's otherwise weak leadership lineup. |
